Pub. 1 2013 Issue 3

Winter Issue 2013 13 articulated in the commission agreement. When writing a commission agreement, three provisions are particularly important. First, the method of computing the commission must be described completely. The employer must define the commissionable basis, whether the commission is based on revenue or a margin of revenue, profit, or another basis. For example, employers must disclose the following: Any applicable costs, adjustment factors, or accounting stages relevant to the commissionable basis; Whether a portion of the revenue is excluded from the commissionable basis (such as reserved gross profit or “packs” in automobile sales transactions); Whether the commissionable amount is based on the amount invoiced, the amount shipped, or the amount collected; How“profit” is defined, if a commission is based on the employer’s profit; All internal costs assessed against a sale to determine its profit; Whether commissions are advanced subject to chargebacks for returned items; and Whether the commission is a fixed amount not subject to a formula (e.g., a per unit sold commission). Second, the agreement must be clear as to when the commission is “earned,” so that the employee’s entitlement to commissions upon termination of employment is clear. For example, is the commission deemed earned when the sale is booked, when the product is shipped or delivered, or when payment is received for the product? These factors must be disclosed. Many commission disputes involve employees contending that they are owed commissions when one of these stages in the sales process has not occurred. Agreements which have omitted mention of when the commission is earned, may well expose an employer to potential liability if commissions are withheld after the point of sale but before one of the above events has occurred. Indeed, ambiguous agreements are generally interpreted in favor of the employee. Another hotspot for litigationwill be what commis- sion, if any, is due upon termination when some but not all of the requirements for earning a commission have been satisfied. For example, if the agreement is ambiguous or silent regarding how commissions are paid upon termination, courts may simply conclude that procuring the sale will alone suffice for earning the commission at the time of termination. Don’t get caught in this trap, and carefully draft your agree- ments to define how the commissions will be paid both during employment and upon termination of employment. If post-sale conditions are carefully defined for earning a commission, such as an obligation for the salesperson to service the account until the product is shipped or the invoice is paid, employers will have some flexibility regarding howmuch of a commission will be paid for sales not yet completed when employment terminates, but again, the terms must be clearly explained. Third, the agreement should explain how draws will be applied to commissions. For example, if the schedule for reconciliation or settlement of commissions is less frequent than the employee’s regular pay period, you may be required to pay a draw so that minimum compensation requirements are satisfied. If there is a formula for calculating the draw, it should be disclosed; otherwise, the amount of the draw, if fixed, should be specified. If the employee is subject to the inside sales exemption (available under Wage Orders 4 and 7), the draw should be an amount to exceed 1.5 times the state minimum wage (currently $8.00 x 1.5 = $12.00) in order to preserve the exemption through the settlement or measuring period for the commission. If commissions are not sufficient to cover the draw, you must disclose whether the draw is a guarantee that will be forgiven if it is not met, or if that excess“unmet”amount will be carried forward to future reconciliation periods (e.g., after the minimumwage, if applicable, has been satisfied).